Google Inc. (Nasdaq: GOOG) found out the hard way yesterday (Thursday) that the only thing worse than having earnings released prematurely is when those earnings are disappointing.
A human error by financial printer R.R. Donnelley (NYSE: RRD) accidentally released Google's third quarter earnings three hours early.
So instead of coming after the bell, Google's bad news hit right in the middle of the trading session. Shares plummeted nearly 10% before trading was suspended.
Wall Street was tough on GOOG because it widely missed expectations.
Profit at the Internet search giant slumped 20% from the same quarter a year earlier to $2.18 billion, or $6.53 a share.
Revenue climbed 45% to $14.1 billion, thanks to its newly acquired Motorola hardware unit. But excluding Motorola, revenue slipped to a growth rate of 19%, the fourth consecutive quarter of slowing revenue.
On the other hand, Motorola's $527 million loss hurt the bottom line.
Excluding one-time items, profit was $9.03 a share, badly missing analyst expectations of $10.65 a share.
The disappointing numbers, coupled with their surprising and untimely release, wiped a whopping $22 billion off Google's market cap in a matter of minutes before shares were halted.
With a little more than 30 minutes left in the session, trading resumed. By the close, GOOG had shed $60.49, or some 8%.
Google CEO Larry Page said on the 4:30 p.m. conference call that he was sorry "for the scramble" resulting from the accidental release and attempted to reassure shareholders.
Breaking Down Google Earnings
- Mobile: Google saw a drop in revenue from both its Web search engine ads as well as ads on its video site YouTube. Ads sales in Q3 rose 15%, down from the 39% growth of a year ago.
Google noted it actually sold 33% more ads in the quarter, but the growth rate fell because the average price paid by Web search advertisers dropped by 15%.Also weighing on revenue was the shift by advertisers toward mobile ads, and the difficulties of monetizing mobile -- an issue shared by Facebook Inc. (Nasdaq: FB).
Mobile ads cost less than online ads viewed on desktop computers.
As mobile continues to grow at an explosive pace, people increasingly are accessing sites via smartphones and tablets. Google and Facebook, among others, are feeling the pain.
"All of these mobile devices are generating clicks that are just less valuable to advertisers. The supply part is doing well, but the supply's going to continue and continue to grow and they could devalue their inventory," Colin Gillis, an analyst at BGC Partners, told the New York Times.
Page said in the conference call that Google understands the challenges of mobile to the company's business model.
"Monetization on mobile queries right now is a significant fraction of desktop," Page said.
He added that Google is exploring fresh ways to capitalize on the shift to mobile and said the company was "uniquely positioned to get through that transition and to profit from it."
"I am not worried about this in terms of our business at all. I think it's an opportunity for us," Page said.
- Search: Another concern for Google is increased competition in its core market, internet search. Google is feeling the impact as users search directly on sites like Amazon.com (Nasdaq: AMZN) and other competitors chip away.
"We're seeing the Yahoo/Bing network taking shares because clients get a 30% better return on their investment than Google," Sameet Sinha, a stock analyst at B. Riley & Co., told The Wall Street Journal.
Not Giving Up on GOOG
Despite the weak Q3 earnings and subsequent steep slump, Google still looks attractive to many.
Here's why.
For all its troubles, Google is best positioned among Internet companies to gain growth in mobile and take advantage of the shift to search on mobile devices.
Google's Android mobile operating system is the global market leader. Plus, Google's search engine remains the default option on rival Apple mobile devices like the iPhone and iPad.
As The Wall Street Journal pointed out, that puts Google in a prominent place to deliver new ads that smartphone users can click to call local merchants, and others, directly. Google is the No. 1 U.S. revenue generator from mobile ads, according to eMarketer.
Additionally, Ken Sena, an analyst with Evercore, told The Wall Street Journal that Google's ads on its still-new shopping page could eventually prove to be beneficial.
Sena says Google is currently valued at roughly nine times his estimates for 2013, a valuation the The Wall Street Journal sees as "pretty reasonable."
Among the analysts that follow Google, only one immediately downgraded shares. Oppenheimer went from an "Outperform" to a "Perform."
According to Thomson/First Call, six analysts maintain a "Buy" on GOOG, one rates shares a "Hold," and one has an "Outperform."
The mean target of 36 analysts is $816.42, well above Friday's close of to $681.79.
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Opportunity in Google's Fat Finger
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